Marginal Analysis: A Fictional Scenario
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The paper illustrates the concepts of marginal revenue, cost, and profit maximization through the lens of the perfectly competitive market and a fictional company, XYZ company. The paper defines several key terms and explains how management looks at marginal revenue and marginal cost in determining the optimum output quantity. The paper clearly shows how marginal analysis is the foundation for financial decision-making at any profit seeking entity.
From the Paper:"Profit maximization for a firm depends on management's understanding of marginal cost and revenue analysis. For the purpose of this discussion the underlying assumption is that the company is operating in a perfectly competitive market; meaning that there are many sellers of essentially the same product, pricing is transparent, and there are few barriers to entry or exit from the market (Mankiw, G. 2004). Of course the realities of a complex economic system are such that a mix of oligopolies, monopolies, and monopolistic competition exist. With that in mind however, explication of marginal revenue, cost, and profit maximization is best understood viewed through the lens of the perfectly competitive market.
"At the outset it is useful to define several key terms which will be valuable in the analysis. Total revenue is defined as the quantity of product sold multiplied by the market price of that good. Assume XYZ company produces 100 widgets and sells them at $5.00 a piece; total revenue would amount to $500.00. Average revenue consists of total revenue divided by quantity produced. Average revenue for XYZ company is $5.00; $500.00 divided by 100 units. If the company sells $200 widgets the total revenue would be $1,000.00, and the average revenue would again be $5.00. As such there is a clear rule to average revenue; "for all firms, average revenue equals the price of the good" (Mankiw, G. 2004).'
Sample of Sources Used:
- Anderson, D.R., Sweeny, D.J., & Williams, T. A. (2006). Quantitative methods for business (10th ed.). South-Western.
- Ball, D. A., McCulloch, W. H., Jr., Geringer, J. M., Minor, M. S., & McNett, J. M.(2007). International business: The challenge of global competition.McGraw-Hill.
- Mankiw, N. G. (2004). Principles of economics (3rd ed.). Chicago, IL: Thomson South-Western.
- McConnell, C. R., & Brue, S. L. (2006). Economics. (17th ed.). McGraw-Hill.
Cite this Term Paper:
Marginal Analysis: A Fictional Scenario (2013, May 03) Retrieved February 27, 2020, from https://www.academon.com/term-paper/marginal-analysis-a-fictional-scenario-153100/
"Marginal Analysis: A Fictional Scenario" 03 May 2013. Web. 27 February. 2020. <https://www.academon.com/term-paper/marginal-analysis-a-fictional-scenario-153100/>